European commission releases baseline report for monitoring the impact of new statutory audit regulation

The European Commission has published a report looking at the impact of the new statutory audit regulation throughout the EU which found that the market of statutory audits of public interest entities (PIEs) remains concentrated in most EU member states although there are insufficient evidence to draw conclusions on the level and effectiveness of competition in the market.

The EU audit reform which came into force on 17 June 2016 aimed at better audit quality and a more competitive audit market for statutory audits of PIEs, however a recent report by the European Commission concluded that thus far the new rules had not broken down concentration.

“In 15 of 21 Member States the Big Four hold more than 80 % of the market share for turnover,” the report read. “Banking and insurance undertakings are the PIE categories where the Big Four have the highest EU-wide market concentration (about 80 %). However, there is insufficient evidence to draw conclusions about the level and effectiveness of competition in the market."

Looking at audit quality, the European Commission scrutinised the quality assurance reviews conducted by the national authorities responsible for audit oversight and found three recurring issues at EU level:

deficiencies in the internal quality control systems;

failure to document some aspects of the audit engagement; and

lack of sufficient audit evidence of having carried out a full audit assessment

However the commission stated that it was too early to assess major risks. But it recommended that going forward a common methodology and supervisory convergence be developed to ensure consistency and comparability. In particular the Commission suggested that work be undertaken to encourage further convergence around common indicators and the terminology for findings and deficiencies.

The third area highlighted in the report had to do with audit committees whose role and powers have been boosted by the audit reform. But the European Commission lamented that most national audit oversight authorities had very little experience in monitoring audit committees activities and performance.

“To overcome this problem the [national audit oversight authorities] should have appropriate tools to assess the [audit committees’] performance and receive the information they need to monitor how [audit committees] are complying with the new rules,” the report read. “For their part, [audit committee] members should be made aware of their new responsibilities and more prominent role. At this stage, engaging with [audit committes] and raising awareness is vital.”

The European Commission concluded that this first report on the topic will act as the baseline scenario for future reports, and that it will continue monitoring developments in the market as comparable data becomes more available over time.

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